Although the financial markets are tumbling with no end in sight, according to a recent report from Bank of America Merrill Lynch, the large majority of fund managers are not that negative about the markets or the global economy. BAML Chief Investment Strategist Michael Hartnett and team note that their most recent survey suggests that financial industry professionals are not yet “Max Bearish,” and that barely an eighth of respondents anticipate a global recession in the next 12 months.

Highlights of BAML fund manager survey – no recession expected

One main highlight of the most recent BAML fund manager survey was that only 12% of respondents believe that a global recession will occur in the next year. Also of note, global growth expectations dropped notably in December to a net 8% from a net 29% in November. However, that weak sentiment reading is not yet as bearish as those seen 2011 and 2012.

The survey also indicated that professional investors remain overweight equities and underweight bonds, and are still holding on to long positions in technology, Eurozone and Japanese stocks (which Hartnett et al. note are the assets that are most vulnerable to a “redemption / recession shakedown”).

Of note, cash levels also continue to move higher. The BAML report showed that cash was up to 5.4%, the third highest cash total since 2009, amid slipping corporate growth and profit expectations. The BAML team also point to a defensive rotation of selling stocks, resources, industrials, banks and EM, and switching positions over to healthcare, staples, cash and bonds.

Also of interest, the continuing strength in the dollar has led to a record underweight in materials, the first industrials underweight in 40 months, and the China recession and EM debt crisis were reported as the biggest “tail risks”.

Hartnett and colleagues also emphasize that investors are generally no longer in denial regarding the risk of recession and an extended bear market, but have “yet to accept macro/markets already well into a normal, cyclical recession/bear market. True capitulation would involve a bout of US$ weakness and outperformance of FMS “shorts” (e.g. BRIC) as redemptions induce forced-selling of “longs” (e.g. FANG). Sell bounces until the 4Cs (China, Commodities, Consumer, Credit) improve.”

Changes in investor positioning – dollar bulls run for the hills and commodity capitulation

The BAML survey also revealed that the number of U.S. dollar bulls had sunk to a 3-year low, as it was down to net 44% from a high of net 87% in November of 2014. The analysts suggest that this development to the fact that Fed rate hike expectations have moved to just two hikes forecast in 2016, down from three a couple of months ago.

Finally, Hartnett et al. highlight that a record net 37% of investors now say they are underweight the global materials sector, a significant increase from net 28% underweight in November.